Navigant takes a wrong turn

Consulting firm is worst Chicago stock of 2010

Continental Bank alum William Goodyear proved there are second acts in Chicago business when he led the rescue of Navigant Consulting Inc. a decade ago after an accounting scandal pushed the Chicago company to the brink of vanishing. Now the CEO needs a third act.

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William Goodyear

This time Mr. Goodyear must fix a mess of his own making: acquisition-fueled growth and a massive, debt-financed stock buyback, neither of which has helped earnings or investors. With projected 2010 profit down 40% from the 2006 peak, Navigant was the worst-performing stock last year among more than 100 Chicago companies with a market cap of at least $100 million and a share price of $5 or more, losing 38%. The stock closed Friday at $9.52; it had been as high as $14.50 last February.

Navigant could be chopped up if the 62-year-old CEO can't turn things around soon. In the meantime, the consultancy is vulnerable to losing more business to stronger rivals including the Big Four accounting firms. Already, its headcount has dropped 4% to 1,665 as of Sept. 30.

“One has to wonder if the company wouldn't be better off as part of a larger organization,” says Bradford Evans, a vice-president and portfolio manager at Milwaukee-based Heartland Funds, Navigant's second-biggest shareholder, with a 6.2% stake.

After Navigant reported third-quarter earnings that fell 27% short of analysts' estimates and cut its outlook, Mr. Evans told Mr. Goodyear in a conference call: “I think the market is . . . losing confidence in the ability of your management and the board to deliver for shareholders.”

Mr. Goodyear, who headed Continental after its acquisition by Bank of America Corp. in 1994, didn't respond to Mr. Evans and declines to comment.

Former Gov. James Thompson, a Navigant director since the late 1990s who helped install Mr. Goodyear, says the board enthusiastically backs him and shares responsibility for the costly stock repurchase. “Bill is a good leader, and he is a good salesman for the company,” says Mr. Thompson, senior chairman of Chicago law firm Winston & Strawn LLP.

Some of Navigant's largest investors are showing less patience. Westfield Capital Management Co. L.P. of Boston, U.S. Bancorp of Minneapolis and Chicago's Citadel Advisors LLC dumped virtually all of their stock, representing 8% of the company, in the third quarter.

On the other hand, Chicago-based Columbia Wanger Asset Management L.P. added 2.1 million shares to become Navigant's biggest shareholder, with a 10.5% stake. None of these shareholders would comment.

PREDECESSOR'S PLAYBOOK

Mr. Goodyear has followed the basic strategy of his ousted predecessor: buying boutique firms to expand into new areas of consulting and boost revenue. Lately, he has focused on the promising but highly competitive litigation and health care markets, adding to the company's original client base in utilities and energy. But litigation consulting related to the financial crisis has lagged because of the legal industry's own downturn.

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Tobey Sommer, a Nashville, Tenn.-based analyst at SunTrust Robinson Humphrey Inc., notes that Navigant's quarterly revenue has been flat at about $175 million since mid-2009. “They've got to generate growth for that strategy to be vindicated,” he says. “So far, it's not there.”

In 2011, analysts expect Navigant to report revenue of $757 million, rebounding to its 2007 level, and profit of $40.8 million, roughly matching its $40.1 million in 2008.

Navigant is suffering from a decision four years ago to buy back 10.6 million shares—almost 20% of the total at the time—at $20.50 per share, more than double today's price. The move swelled debt sevenfold, to $282 million, and was questioned at the time by an analyst who noted that the stock was trading $3 below the tender offer.

Former Gov. Thompson is putting his money where his mouth is. In November, he exercised options and bought 20,000 Navigant shares. “I could have taken my cash out,” he says. “I believe in the company.”